October 24, 2020

The grandmother’s envelope method or how to make our money multiply


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“Saving goes hand in hand with needs, but we have turned needs into what used to be whims and the problem comes from the extraordinary has become ordinary and we do not value it,” explains José Rodríguez Cuadrado, councilor of Majadahonda and author of “If you don’t make ends meet, it’s because you don’t want to” (Union Editorial). Rodríguez Cuadrado, who also worked at the Value School finance school founded by the investor Francisco García Paramés, recounted in a telephone interview his tricks to save money, invest it and above all, to know how to live without wasting or consuming goods that we really do not need.

Rodríguez Cuadrado believes that a change in mentality is urgently needed, especially in times of crisis that we are experiencing due to the management of the pandemic, and urges to bet on dedicate time to our financial training to spin and understand concepts. The author and financial expert assures us that if our knowledge increases, our family economy will stop working like “a house of cards that blows away” and that collapses in the face of any unforeseen event. It also summarizes the golden rules in three so that our savings multiply: “Maintain the investment in the long term, diversify and average, that is, do it periodically every month.”

What is the first step in undertaking a savings plan?

The most important thing, and hence the title of the book, is to change the way of thinking. Society associates spending with being happy, but the pandemic has shown us that other things are important, such as family, to whom and how we dedicate our time, to be able to live calmly and health. The first thing to do is to transform the accounts and instead of waiting until the end of the month to see if one arrives, at the beginning of the month we must see how we are going to invest our budget and spend less than what we enter.

Are you talking about the so-called pre-savings method that is so fashionable now?

The pre-saving method, proposed by authors such as Luis Pita, is based on saving at the beginning of the month, separating the money that is going to be spent and saving the rest. This is the method of the grandmothers’ envelopes, who distributed the money by items and put the money intended for them in each envelope. If I spend the 200 euros of the envelope from the supermarket before the end of the month, you cannot take money from anyone else. In that case, we will have to resort to the bottom of the closet, that is, the mattress that I have saved. Also, if, for example, the leisure envelope has not been touched, we can pay tribute and spend half of what is left at the end of the month; I’ll save the other half and use it for the wardrobe. Another of the envelopes that will be separated at the beginning will be that of savings to get a liquidity cushion and not have to borrow money again in the event of an unforeseen event. Also, I can see my money grow and multiply if I invest it. If I follow these tips, I will be able to live in peace when retirement arrives.

“You have to avoid asking for a loan because the interest ends up going against us”

So, should we never choose to ask for a quick loan or for loans to cover holes?

I recommend avoiding all types of debt, except the mortgage, because it entails that interest is paid and that the force of compound interest works against us. Compound interest gives us interest interest and investment grows exponentially, not arithmetically. Therefore, the curve will be very steep if we hold our investment over time. However, loans push the curve in reverse and interest ends up going against us, making it increasingly difficult to repay the debt. For example, if we buy a five-year car for 15,000 euros and ask for a loan at an interest rate of 6.95%, we will be paying 16% of the final price in interest. In summary, we will pay 2,755 euros only in interest. The consumer does not think about this when buying a car. Also when we buy a house for 30 years and ask for a mortgage for 240,000 euros at an APR of 2.05%, we are going to pay interest for almost 63,000 euros, that is, 23%. In short, interest makes everything more expensive.

Jose Rodriguez Cuadrado
José Rodríguez Cuadrado – ABC

Do we have a culture of savings in Spain?

The culture of saving in Spain has been linked to the mortgage since the tradition of the apartment in property has been very positive because it has forced many people to save. Today, the youth savings culture is almost non-existent. On the other hand, the pandemic has made savings grow, but not so much because of a voluntary decision as because of the consequence of not being able to leave. We must remember that saving is postponing spending and we tend to want the here and now, it is in our DNA. Saving looks to the future, but we see it as something negative because the consumer society and advertising encourage us to spend. We have to see saving as something positive because it will give us the peace of mind of knowing that if we have financial difficulties, nothing will happen.

“Half of my high school students, regardless of the income level of the neighborhood, had a better mobile than mine, which costs about 200 euros”

Is it more difficult to save on a low salary?

Actually, it is not the richest who has more, but who needs the least. When I was going to give talks on saving and responsible consumption in first-year baccalaureate courses in schools, I loved to ask how many students had a better mobile phone than mine, which is priced at around 200 euros. Half the class, regardless of the income level of the neighborhood, always raised their hands. I think that a 16-year-old student needs a mobile of more than 200 euros for little. Saving goes hand in hand with needs, but we have turned needs into what used to be whims and the problem is that the extraordinary has become ordinary and we do not value it.

Speaking of colleges, should financial education be taught as part of a regulated subject?

The freedom that comes from not being burdened to make ends meet is worth it. Financial education cannot be about settling the accounts so that income equals expenses, which is what some understand by this. I understand by financial education that one has to spend less than what he earns, save and see that amount grow to live peacefully. You have to be the owner of your money and not just depend on balancing the accounts.

“You have to be the owner of your money and not depend solely on balancing the accounts”

Where should we start investing our money to see it grow?

You have to follow three golden rules and one is to keep the long term, that is, more than 10 years. Another is to diversify, that is, to invest in different companies so that if a bankruptcy occurs, this remains an anecdote. It is also necessary to diversify by sectors, for example, technology, pharmaceuticals, etc. and also in different geographical areas.On the other hand, diversification must also reach investment strategies, for example, in indexed or in securities, that is, the known as “value investing”. The third rule would be to average, that is, invest periodically every month. The Stock Market is the only place where people do not like to buy on the sale and averaging means that you forget about the swings and eliminate the emotion biases that push us to buy when stocks rise and sell when they fall. In the end, this leads us to lose our heritage. The monthly investment can even be automated. Having a bit of index funds is great and if I don’t have the assets for this, you can choose some ETF’s associated with different markets. What to avoid is trusting a manager who charges for a specific investment recommendation. If my manager advises me a product with which he charges a commission, I have to avoid that recommendation. Before investing, you have to do a research work to know where we put our money. To be calm, you have to buy a world index (MSCI World) and thus achieve an average of 7% profitability that studies say.

“The three golden rules of investment are to maintain the long term, diversify and average, that is, do it periodically”

Is it not advisable then to use an advisor when investing?

I recommend that each one investigates to be calmer and if you go to a manager, that it is not on your part. It is better that the manager charge us for advising us to take a commission from the fund that he has recommended. Since emotional biases betray us, we have to make sure that we are truly convinced. The manager in which the investor Peter Linch had one of the funds considered to be one of the best did an analysis and found that half of the participants in that fund had lost money despite rising 30% annually in 13 years. This was because they came off when it was low and bought when it was high. The participants who did the best were those who had forgotten the background and did not look at it or those who had died.

Will our thinking change after the pandemic?

Yes, because we have seen that any disaster can ruin us as a society from one moment to the next and people have realized that they need a savings cushion. Also because we have changed our priorities in spending and we have begun to value things that do not cost money,

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